Swapping wallets for smartphones
Google Inc is trying to nudge consumers and merchants into a world where the smartphone has replaced the wallet as the container for credit cards, coupons and receipts.
In Google's vision shoppers will touch their phone screen to select a card, then tap the phone to a credit-card reader in a store or restaurant. Google would make money by selling coupons and advertising that come along with the experience.
It's a goal shared by others. The Internet search and advertising company faces tough competition from cellphone companies, payment card issuer Visa Inc, eBay Inc's PayPal payment service and others. All of them want to play the central role of tying together phones, retailers and banks into a new payment system.
This isn't Google's first attempt at electronic payments. The company, based in Mountain View, California, introduced an online payment service called "Checkout" five years ago. It hasn't posed a serious threat to PayPal.
Google views its digital wallet as a way to sell advertising at a pivotal moment: When shoppers are in stores, ready to spend money and even more receptive to coupons and other discount offers.
Nick Holland, an analyst at Yankee Group, said that although all parties stand to benefit from Google's system, Google itself has the most to gain. That's because the Google Wallet would allow the company to "own" the market for advertising that's tied to the user's location.
Google said it's launching a Google Wallet trial in San Francisco and New York in co-operation with Visa rival MasterCard and Citibank. It will open up the system to consumers later in the summer. It then plans to expand across the country.
There has been talk of smart payment systems for years, and Google faces the same hurdles that have stifled previous trials.
One is that Google Wallet will initially work on only one smartphone, the Google Nexus S 4G carried by Sprint Nextel Corp.
Several smartphone makers, including Research In Motion Ltd, maker of the BlackBerry, are ready to bring out more phones with chips for so-called Near-Field Communications, or NFC, but it's uncertain if they'll work with Google's system.
Another hurdle is getting retailers to invest in terminals that can talk to the phones. Google Wallet will connect only to MasterCard PayPass terminals. There are more than 135,000 of those in US stores and restaurants, but that's only a small fraction of the total number.
Google's carrot is that retailers will be able to put loyalty cards and coupons in the Wallet, helping them track and engage with their customers. Partners in the trial include Macy's, RadioShack, Subway, Toys R Us, Duane Reade and Walgreens.
Yet another problem: Google needs to get cellphone companies on board. Its partner Sprint is the country's third-largest. AT&T Inc, Verizon Wireless and T-Mobile USA, the rest of the four biggest national carriers, have formed their own consortium to create a wallet that will compete with Google's.
The final obstacle is persuading consumers to take the leap. Phones might one day offer slightly faster checkouts, but the benefit would be small.
Google calls Wallet a "single-tap solution," but in a demonstration on Thursday at Google's New York office, a Google executive had to tap his phone twice to a terminal provided by retail partner American Eagle Outfitters Inc, then sign on the screen to get a purchase of a pair of denim shorts through.
Osama Bedier, Google's vice-president of payments, said it was up to the retailer to decide if the shopper has to sign on the screen.
"Consumers and businesses don't have a compelling need for changes in payment methods," a recent study by the Federal Reserve said. It nevertheless concluded that there are substantial benefits to reap for everyone involved if mobile payments become a reality.
One of the potential benefits is increased security compared to cards with magnetic strips, which can be copied surreptitiously.
The Wallet will initially work with a MasterCard from Citigroup Inc and with a prepaid debit card issued by Google, but the intent is to let the wallet accept any card.
"This is about creating a compelling model and asking folks to join," Bedier said.
Banks and payment processors such as MasterCard and Visa like the idea of mobile payments, but have their own designs on the space.
Visa already has announced plans for its own wallet. MasterCard is collaborating with Google but is working on its own projects.
"Today's announcement is another early salvo in what will be a long and hard-fought battle to change consumers' payment behaviour and, as a potential result, the makeup of the payments landscape," said Forrester Research analyst Charles Golvin